Market Breadth Broadens, But There Are Flies in the Ointment
Here's why we believe some caution still makes sense.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
All the major equity indexes closed higher Friday with three other indexes shifting from bearish to neutral as what appears to be the nascent stages of rotation expanding away from the mega-caps continued. Cumulative market breadth has improved noticeably as well.
However, while we like the fact that breadth is broadening, there are still some flies in the ointment, including an S&P 500 that is quite overvalued with investor sentiment overly bullish.
DJIA Makes New Closing High
On the charts, all the major equity indexes closed higher Friday with positive internals on lighter volume.
They largely closed near the midpoint of their intraday ranges as the DJIA (see below) posted a new closing high.
Additionally, the MidCap 400 and Russell 2000 closed above resistance, turning their trends to bullish from neutral. We believe that action adds credence to our sense that some rotation of note is occurring as some money exits the mega-caps and is deployed in the SMIDs.
Only the Dow Jones Transports remains neutral with all others bullish.
Cumulative market breadth continued to improve with the advance/decline lines for the All Exchange, NYSE and Nasdaq bullish.
Warnings were generated for the Nasdaq Conposite and Nasdaq 100 as both registered bearish stochastic crossover signals.
NYSE McClellan OB/OS Oscillator Very Overbought
The data finds the 1-Day McClellan Overbought/Oversold Oscillators well into overbought territory with the NYSE very overbought, which may suggest some pause/consolidation over the near term, despite Monday morning's gains (All Exchange: +98.31 NYSE: +104.17 Nasdaq: +95.9).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 69%, staying neutral.
Of note, the detrended Rydex Ratio (contrarian indicator) remains bearish, rising to 1.21 with the leveraged ETF traders very leveraged long again.
Thus, two of the three sentiment indicators are bearish with last week’s AAII Bear/Bull Ratio (contrarian indicator) dropping to 0.59 and neutral as the Investors Intelligence Bear/Bull Ratio (contrary indicator) stayed bearish at 16.9/63.1 as bulls continued to outweigh bears by a wide margin.
The Open Insider Buy/Sell Ratio remains neutral at 34.2.
Leveraged ETF sentiment is 26.7 remaining neutral.
Valuation Shows 600 BP Premium
The 12-month consensus earnings estimate for the S&P 500 from Bloomberg dropped further to $252.49 per share, leaving its forward P/E multiple at 22.2x and well above the “rule of 20” ballpark fair value at 15.8x. Its over 600-basis point premium remains significant.
The S&P 500 earnings yield dipped to 4.48%.
The 10-Year Treasury yield slipped to 4.19%. Support is 4.16% and resistance is at 4.29%. Its near-term trend is bearish.
The U.S. dollar, via the UUP ETF, closed lower at $28.69. Its trend is neutral with support at $28.69 and resistance at $28.94.
Bottom Line
While we are doing some very selective buying, some caution remains appropriate.